eBay to spin off PayPal: U-turn and humiliation for board

The online marketplace giant eBay will spin off its PayPal payments business as a separate company next year after months of pressure from activist eBay shareholder Carl Icahn.

eBay’s current chief executive John Donahoe insisted the move to create two separate companies was a result of a recent strategic review - but analysts were in no doubt that Mr Icahn had won a major victory.

Mr Icahn tweeted simply: “Happy about spin-off of PayPal.” The payments business currently provides roughly 40 per cent of eBay’s revenue.

eBay shares rose about 7 per cent to give it a stock market value of $71bn (£45bn), while analysts said a separate PayPal company could have a market valuation of at least $30bn (£18.75bn) and possibly a lot more. eBay bought PayPal for about $1.5bn in 2002.
Having said in January it did not believe breaking up the company was best for shareholders, eBay’s board said yesterday that “creating two standalone businesses best positions eBay and PayPal in the rapidly changing global commerce and payments landscape, and is the best path for creating sustainable shareholder value.”

After the split, Mr Donahoe will not be the top executive at either of the new companies, but said he expects to be on the board at one or both of them.

“A thorough strategic review with our board shows that keeping eBay and PayPal together beyond 2015 clearly becomes less advantageous to each business strategically and competitively,” said Mr Donahoe.

“The industry landscape is changing, and each business faces different competitive opportunities and challenges.”

Analysts said that as a separate company, eBay could become an even more attractive takeover target, and that an independent PayPal faced immediate and increased competition in payments from rivals like Apple and Google.

“By separating marketplace and PayPal, it could make marketplace more attractive as an acquisition, which is something that investors have been thinking about since Alibaba’s IPO,” said analysts at PiperJaffray.

“On PayPal, investors will still contemplate the risk of PayPal directly competing with Apple Pay and Google Wallet, which will likely add some uncertainty to PayPal’s standalone valuation.”

eBay said Mr Donahoe and chief financial officer Bob Swan will be responsible for leading the separation of the businesses, but neither would have an executive management role in the new eBay and PayPal companies.

Devin Wenig, former head of the markets division at Thomson Reuters and currently president of eBay marketplaces, will become chief executive of the new eBay.

eBay said revenue over the last 12 months at its marketplaces and enterprise businesses grew 10 per cent to $9.9bn, with marketplaces accounting for about $8.7bn.

After the split, the chief executive of PayPal will be Dan Schulman, who joins the company from American Express, where he was president of the company’s enterprise growth group.

eBay said fast-growing PayPal is “the most trusted digital wallet” with more than 152 million active registered accounts. It added that PayPal’s revenue grew by 19 per cent to $7.2bn over the past 12 months and it now facilitates one in every six dollars spent online.